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Madoff Report Highlights SEC Lapses in Detecting Fraud

A scathing report by an inspector general for the Securities and Exchange Commission has found the agency missed numerous chances to uncover Bernard Madoff's Ponzi scheme. A financial reporter and a law professor speak with Jeffrey Brown about the SEC's framework for detecting fraud.

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    It's a blistering review of failure at the Securities and Exchange Commission. A newly released report by the agency's inspector general details a series of missed opportunities and botched inquiries into Bernard Madoff's investment schemes, concluding that, despite numerous credible and detailed complaints, the SEC never took the necessary but basic steps to determine if Madoff was operating a Ponzi scheme.

    The report found no significant attempts made to analyze the numerous red flags about Madoff's business, a team with little to no experience conducting Ponzi scheme investigations, and simultaneous investigations by different offices, without either knowing the other one was conducting an identical examination.

    Bernard Madoff ended up bilking investors for billions of dollars. He was sentenced in June to 150 years in federal prison. We look at the details in the new report now with Kara Scannell, who covers the SEC for The Wall Street Journal, and John Coffee, professor of securities law at Columbia Law School. He has advised the SEC in the past, but was never consulting about this case.

    Well, John Coffee, this report represents a tough very moment for the SEC.


    This is more than a tough moment. This is probably the biggest embarrassment they have had in their 75-year history. Basically, it's demoralized the agency and impacted on its reputation.

    I would say that this was always the strongest of the federal independent agencies. But, right now, I think that the whole agency is under a cloud, and it's struggling very diligently to get out from underneath that cloud.


    All right, let's try to look at a little bit of this, Kara. The numerous opportunities for the SEC to do something, what does that mean? Give us some examples. What was there for the SEC to see?


    Well, when they first got a look at Madoff in 1992, it was through two accountants who were selling unregistered securities, so basically selling the securities to the public, and no one knew.

    When the SEC went to look behind it — they thought it was a Ponzi scheme — they found out that who was managing the money, but Bernard Madoff. At that point, they could have looked to have seen — they given the — they had returned the money to those investors, but they never looked to see where that money came from.

    So, did it come from other investors, or was the money there, as it should have been? If they had kicked the door down a little bit more to see where the money was coming from, they might have concluded at that time that it was a Ponzi scheme.

    And there were numerous tips since then over the years, from 2000, 2003, 2005, 2006, where people were raising questions about the viability of his trading strategy. Was it just even possible, the way that he was describing he was making money?